‘Current account deficit likely to hit 10-year high’

It also expects the current account deficit to widen to a 10-year high of 3 per cent of GDP in FY23. “The key channel of impact for the economy will be higher cost-push inflation, feeding into broader price pressures, which will weigh on all economic agents — households, business and the government,” Morgan Stanley said in a report.

The risk would stem from a further sustained rise in oil prices, leading to quick deterioration in macro stability and currency volatility, Morgan Stanley said. In the wake of continued geopolitical tensions, the surge in oil prices is likely to be sustained, which would lead to deterioration in the current account deficit from a higher oil import bill. “Our sensitivity analysis shows that a 10 per cent rise in oil prices would widen India’s current account deficit by 30-35 bps of GDP,” it said.

“Further, we expect the balance of payments to be in deficit of approximately 0.5-1 per cent of GDP because capital flows are likely to be lower than the current account deficit,” it said. The extent of vulnerability to funding risks will be cushioned by the large forex reserves, which along with forward book stand at $681 billion.

Morgan Stanley expects the April policy to mark the process of policy normalisation with a reverse repo rate hike. However, if the RBI were to delay its normalization process, the risk of disruptive policy rate hikes would rise. “We see less room for fiscal policy stimulus to support growth given high deficit and debt levels – we see a possibility of a modest fuel tax cut and reliance on the national rural employment program as an automatic stabiliser,” it said.